Beyond Incentives: How to Build Sustainable DeFi
Jesus Rodriguez proposes eight methods for DeFi projects to attract and retain users without relying on liquidity mining.
With the emergence of new public chains like BeraChain, TON, Plume, and Sonic, DeFi is experiencing a new wave of growth. Each new chain comes with extensive incentives to attract users with high yields, reminiscent of the early days of liquidity mining in 2021.
But is this sustainable? While each chain is striving to build momentum, they inevitably face the same challenge: how to build a sustainable ecosystem that can survive after incentive programs end?
Incentive measures remain one of the most powerful cold-start tools in the crypto space, effectively addressing user and liquidity attraction. However, incentives are just a starting point. The ultimate goal is to build a self-sustaining economic activity around DeFi protocols.
Despite the overall development of the DeFi market, the growth model dependent on incentives has hardly changed. For DeFi to thrive in a new phase, these strategies must adapt to current capital dynamics.
Key Challenges in DeFi Capital Formation
Although incentive programs are seemingly necessary, most ultimately fail or perform poorly. The current DeFi market structure is vastly different from 2021 when running incentive programs was relatively simple. The market has changed, and several key issues are worth considering in DeFi capital formation:
1. Public Chains Far Outnumber Quality Protocols
In traditional software ecosystems, platforms (Layer1) typically generate more diverse applications (Layer2 and above). But today's DeFi landscape is precisely the opposite. Dozens of new public chains like Movement, Berachain, Sei, and Monad are launching or upcoming, while truly attractive DeFi protocols are scarce, with only a few standouts like Ether.fi, Kamino, and Pendle. The result? A fragmented market landscape where public chains compete for the same few quality protocols.
2. No New "Gamblers" in This Cycle
Despite the surge in public chains, the number of active DeFi investors has not grown synchronously. User experience friction, complex financial mechanisms, and uneven wallet/exchange distribution limit new user entry. As one of my friends said: "This cycle hasn't minted many new gamblers." The result is capital dispersion, with users chasing yields across ecosystems rather than deeply engaging with a single ecosystem.
3. TVL Fragmentation
This capital fragmentation is evident in TVL data. As more public chains and protocols compete for the same limited users and funds, we see dilution rather than growth. Ideally, capital inflow should be faster than the growth of public chains and protocols. Otherwise, capital will become increasingly dispersed, weakening the potential impact of individual ecosystems.
4. Institutional Interest High, but Retail Infrastructure Lacking
Although retail users have dominated the DeFi narrative, in reality, institutions have driven most transaction volume and liquidity. Ironically, many new public chain ecosystems lack the integrations, custody support, and infrastructure institutions require, making it difficult to attract institutional funds. Without institutional channels, attracting large-scale liquidity will be a tough battle.
5. Ineffective Incentives and Market Misallocation
Many new DeFi protocols launch with poor market allocation, leading to imbalanced liquidity pools, slippage issues, or misaligned incentives. These inefficiencies often disproportionately benefit insiders and whales while contributing little to long-term value creation.
Building Beyond Incentives
The ultimate goal of incentive programs is to catalyze organic activity that continues even after rewards dry up. While there's no guaranteed blueprint for success, several foundational elements can increase the chances of building a sustainable DeFi ecosystem.
1. True Ecosystem Utility
The most difficult but most important goal is to build an ecosystem with non-financial utility. Public chains like TON, Unichain, and Hyperliquid are early examples where token utility extends beyond pure yield. However, most new public chains lack this fundamental utility and heavily rely on incentives to attract attention.
2. Strong Stablecoin Foundation
Stablecoins are the cornerstone of any functional DeFi economy. An effective approach typically includes two primary stablecoins to anchor lending markets and establish deep AMM liquidity. A well-designed stablecoin combination is crucial for unlocking early lending and trading activity.
3. Mainstream Asset Liquidity
Beyond stablecoins, deep liquidity for blue-chip assets like BTC and ETH reduces friction for large capital allocators. This liquidity is critical for attracting institutional funds and enabling capital-efficient DeFi strategies.
4. DEX Liquidity Depth
AMM pool liquidity is often overlooked, but slippage risk can actually disrupt large trades and suppress activity. Establishing deep, robust DEX liquidity is a prerequisite for any serious DeFi ecosystem.
5. Lending Market Infrastructure
Lending is the fundamental primitive of DeFi. A deep lending market (especially for stablecoins) can unlock various organic financial strategies. A robust lending market naturally complements DEX liquidity and improves capital efficiency.
6. Institutional Custody Integration
Custody infrastructures like Fireblocks or BitGo hold most institutional crypto funds. Without direct integration, capital allocators are effectively excluded from new ecosystems. Often overlooked, this is a critical threshold for institutional participation.
7. Cross-Chain Bridge Infrastructure
In today's fragmented DeFi world, interoperability is crucial. Cross-chain bridges like LayerZero, Axelar, and Wormhole are key infrastructures for transferring value across chains. Ecosystems with seamless cross-chain support are more likely to attract and retain capital.
8. Intangible Factors
Beyond infrastructure, subtle but critical factors influence success. Integration with top oracles, the presence of experienced market makers, and the ability to attract renowned DeFi protocols all contribute to launching a thriving ecosystem. These intangible factors often determine a new public chain's success or failure.
Sustainable Capital Formation in DeFi
Most incentive programs fail to deliver on their initial promises. Excessive optimism, incentive misalignment, and capital fragmentation are common reasons. It's unsurprising that new programs are often viewed skeptically as benefiting insiders. However, incentives remain essential. When designed correctly, they can effectively bootstrap ecosystems and create lasting value.
The difference in successful ecosystems isn't the scale of incentive programs, but what follows.
Stable stablecoin foundations, deep AMM and lending liquidity, institutional channels, and carefully designed user flows are the cornerstones of sustainable growth.
Incentives are not the endpoint, but the starting point. And in today's DeFi, there's clearly more vitality beyond mining incentives.
